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Investment Analysis

Asian residential property buyers beware

by PRINCE CHRISTIAN CRUZ

Jan 06, 2008


Fig.1 INFLATION - ADJUSTED HOUSE PRICE INDICES (1995=100)

SOURCE: Various sources, see list here

Asia's real estate markets seem, on the surface, to have recovered from the Asian crisis and to be back on their feet. Robust price and rental rises are reported in the media. Real estate developers are competing for ad space. New projects and launches are everywhere. Residential property appears to be having a blast.

The housing markets of both Thailand and Hong have seen strong rises over the past two years (though both are weaker now).

In the Philippines condominium prices rose 10.9% in 2005, and 8.5% in early 2006.

Indonesia seems set for another strong year, with house price rises of more than 7%.

Singapore is picking up steam, as is South Korea. Only Malaysia's housing market still appears anemic, with a mere 2% price rise this year.

Table 1. ANNUAL HOUSE PRICE CHANGE (%)

COUNTRY NOMINAL REAL
2004 2005 2006 2004 2005 2006
Philippines 6.02 10.61 8.45 -1.54 3.61 1.24
Indonesia 4.62 7.87 7.37 -1.59 -8.41 -7.05
Singapore 0.89 3.87 6.08 -0.28 2.53 4.61
South Korea -2.10 -1.30 4.80 -4.99 -4.31 2.43
Thailand 9.27 7.19 3.92 6.16 1.33 -1.85
Hong Kong 27.37 23.90 -3.73 27.09 22.60 -6.07
Malaysia 2.60 2.20 .. -2.05 -3.18 ..
SOURCE: * Latest data available, see list here

Not for real

But is this rosy picture for real? When adjusted for inflation, the picture changes remarkably.

Indonesia, for instance, is having a difficult time battling inflation. Pushed by rising global oil prices, Indonesia's consumer price index rose 10.5% in 2005, and is expected to rise 14.2% in 2006. Corrected for inflation, Indonesia's house prices actually fell 8.4% in 2005 and 7% y-o-y during 2Q 2006.

This year's mild nominal price fall in Hong Kong (3.7%) is amplified by considering inflation. Dwellings prices have actually fallen by 6% in real terms.

The (modest) apparent price rises in South Korea, Singapore and the Philippines actually become price falls, or are greatly moderated, once inflation is factored in.

Fig.2 HOUSE PRICE FALLS (AND RISES) SINCE THE PRE '97 PEAK (adjusted for inflation)

SOURCE: Various sources, see list here

The Philippines' recovery is pushed back by a year, and after adjustment for inflation, is seen to have begun only in 2005. Malaysia's apparent mild price increases of 2004 and 2005 are found to be illusory, because in real terms, Malaysian house prices have been falling.

Still below pre-Asian Crisis levels

All across the region, property prices are still below pre-crisis levels, except for Thailand.

Fig.3 PHILIPPINES LUXURY CONDOS PRICES (1995=100)

SOURCE: Colliers Philippines

Philippines: 55% below peak

The Philippines has experienced the biggest drop in property prices among the economies affected by the crisis. A speculative bubble formed in the 1990s in the Philippines' property sector, after financial liberalization and economic reforms had attracted capital inflows. Luxury condominium prices rose 63% (46% in real terms) between 1995 and 1997.

With the Asian crisis, Philippine luxury condominium prices dropped 18% (25.3% in real terms) from 1997 to 1998. Political crises led to further deterioration of the real estate market, till a mild recovery began in 2004. Luxury condominium prices in the Philippines dropped 56.2% in real terms (34.36% nominal) between 1997 and 2004. With minimal real gains in 2005 and 2006, property prices are still 50% to 55% below their 1995 peak in real terms.

Fig.4 INDONESIA HOUSE PRICE INDEX (1991=100)

SOURCE: Bank of Indonesia

Indonesia: 50% below peak

Property prices in Indonesia were already declining well before the Asian crisis. True, they increased by 3% to 4% between 1996 and 1998 in nominal terms, but this was illusory, because inflation was on average 18% per annum from 1994 to 1998 (peaking at 88.4% in Sept 1998).

So in real terms the residential property price index has suffered an almost continuous decline in real terms since 1994, dramatically accelerating from 1998 to 1999. By 1999, the all new houses price index was about 50% lower than its 1994 level.

Fig.5 THAILAND HOUSE PRICE INDEX (1991=100)

SOURCE: Bank of Thailand

Thailand: 10% below peak

Correcting for inflation Thailand's house prices peaked in 1992, and today's prices are still 10% below the 1992 level. This is largely because, contrary to popular belief, house prices in Thailand were not rising pre-crisis. Indeed the mid 1990s actually saw a mild decline, in real terms. That decline accelerated after the Asian crisis, and house prices fell 18% from 1998 to 1999.

Thailand's house price index quickly recovered post-crisis. It rose 53.8% (29.3% in real terms) from 1999 to 2006 thanks to strong economic growth.

However, all is not well in the political arena. As political pressure built up for Prime Minister Thaksin to resign leading to the September 2006 coup, the house price index fell 1.7% (3.5% in real terms) in 2Q 2006 over the previous quarter.

Fig.6 MALAYSIA HOUSE PRICE INDEX (1990=100)

SOURCE: Central Bank of Malaysia

Malaysia: 10% below peak.

With strong economic growth and huge export earnings, property was hot in Malaysia in the early 1990s. With two particular peaks in 1991, when a 26% (20.3% in real terms) y-o-y real price growth was achieved, and in 1995 with an 18% (14.5% real terms) real price growth.

When the Asian Crisis hit Malaysia, house prices fell 11.7% (18.8% in real terms) between 1997 and 1999. With a price increase of 22.6% (10.7% in real terms) from 1999 to 2005, house prices in Malaysia are still 10% below their peak pre-crisis level in real terms.

Hong Kong: 61% below peak

Hong Kong property prices, as of 2Q 2006, are still 42% below their 1997 peak level, despite the significant recovery of the past two years. The collapse of the Thai baht came 24 hours after the handover of Hong Kong from UK to China. The Asian crisis combined with the bursting of pre-handover speculative bubble caused a 44.7% price decline from October 1997 to 1998. From 1997 to 2003, Hong Kong residential property prices fell by no less than 66% in nominal terms (61% in real terms due to deflation).

Tung Chee Hwa's pledge (or threat?) to supply 85,000 new flats annually from 1998 onwards is widely believed to have depressed housing prices in the wake of the Asian Crisis.

Fig.7 HONG KONG PRIVATE DOMESTIC PRICE INDEX (1993=100)

SOURCE: RVD

Subsequent events exacerbated the crisis:

1. the global economic slowdown in 2001; and
2. the outbreak of SARS virus in early 2003.

The strong price increases in 2004 and 2005 in Hong Kong can be attributed to a partly political decision. Mortgage interest rates paid by Hong Kong borrowers have fallen from 11% in the post-crash environment of 1998, to under 3% at their lowest point from 2003 to mid-2005. The fall in mortgage rates was significantly larger than that made possible by the fall in US rates.

The causes were threefold:

  1. the elimination of the Interest Rate Rules of the Hong Kong Association of Banks (popularly known as the 'banking cartel');
  2. measures taken by the Hong Kong Monetary Authority to relax market entry criteria; and
  3. the formation of the Hong Kong Mortgage Corporation (HKMC), which allowed banks to offload parts of their mortgage portfolio to the HKMC and securitize the rest.

In early 1998, the mortgage rate was priced at prime market interest rate plus 1.25%. Now it is priced at around prime minus 2.375%. The mortgage rate is therefore 3.75% percentage points lower as a result of the change in the pricing practice of the banks.

Singapore: 37% below peak

With economic stability and increased purchasing power, the immense demand for housing in Singapore led to rapid increases in house prices in the 1980s to 1990s. From 1986 to 1996, the private residential price index rose by about 440%.

The government then stepped in to curb property speculation.

In 1996 there was an intense campaign against property speculation. The government also began to liberalize housing financing policy in a very significant manner, encouraging the public to buy HDB flats. These measures, combined with the Asian crisis, led to 45% fall in house prices in just two years (1996-1998).

Singapore slightly recovered from 1998 to 2000, but global events plunged it back in crisis. Property prices in 2005 were at the same level as in 1994. In 2006, property prices are 32.7 % (36.9% in real terms) below their 1996 peak.

Fig.9 SOUTH KOREA HOUSING PRICE INDEX (1990=100)

SOURCE: BIS

South Korea: 38% below peak

House prices in South Korea started recovering from the Asian crisis in 2001. The housing index registered price rises of 9.9% (6.5% in real terms) in 2001, 16.4% (12.2% real terms) in 2002, and 5.7% (2.2% real terms) in 2003.

However, left-of-center president Roh Moo-hyun felt that house prices are rising too fast. To combat 'property speculation', he increased capital gains taxes, tightened regulations, and used a host of persuasive measures. In 2004, house prices fell by 2% (5% in real terms). In 2006, property prices were 38% below their 1991 peak in real terms.

The subsidy dimension

How much have political developments affected house prices? Certainly, the ouster of Suharto and Estrada (see "Politics -- the bane of Asia?") were accompanied by substantial economic disruption, which impacted the property markets to a significant extent. And in Thailand, the recovery of the real estate market is now being threatened by the ongoing political crisis.

In Hong Kong, Singapore and South Korea, although they are bastions of free enterprise, they are also examples of massive government intervention in the housing sector, on a scale unknown outside the former Soviet block. This intervention itself is a kind of political interference in economics, and has negatively impacted free-market house prices.

COUNTRY YEAR OF SURVEY TOTAL DWELLINGS OWNER-OCCUPANCY RATE (%) RENTAL RATE (%) OTHERS (%)
Total Social Private
Hong Kong 2004 2,397,000 57.0 43.0 31.0 12.0 ..
Indonesia 1995 43,500,000 83.7 11.8 .. 11.8 4.5
Malaysia 1998 4,060,900 85.0 13.0 7.0 6.0 2.0
Philippines 2000 14,891,127 71.1 10.1 .. 10.1 18.8
Singapore 2005 1,049,011 92.0 7.0 5.0 2.0 1.0
South Korea 2000 12,988,000 56.0 44.0 3.5 40.5 ..
Thailand 2000 15,496,000 82.0 18.0 .. 18.0 5.0
* Latest data available
Source: Various, see list here

About 31% of Hong Kong's population lives in public rental housing estates, one of the highest rates in the world. An additional 433,000 or 32% of the 1.34 million private residential units have been sold at discounted prices under the government's various subsidized home ownership schemes, while 12% of the population lives in private rental housing (owner occupancy is at 57%). There are around 94,000 applications on the Waiting List of public rental housing (PRH) units with an average waiting time of two years. There are around 720,300 PRH units.

In Singapore, the post 1985 encouragement of HDB housing purchases, and the government's campaign against property speculation, arguably were major causes of the pre-Asian crisis property slowdown. Since independence a major government goal has been to promote home-ownership. 85% of the population lives in flats constructed through the programs of the Housing and Development Board (HDB). Owner occupancy is now at 92%. In addition, about 7% of households live in public housing.

In South Korea, government intervention has recently strongly depressed house prices. South Korea has one of the most complex public housing systems in the world. It is designed to be based on private investment, but the entire process - from site planning to the sale of completed houses - has to be approved by the proper authorities. Past and present Korean governments have introduced massive housing programs to increase the housing supply.

From 1990 to 2004, around 560,000 housing units in South Korea were constructed annually by the government. With this, the ratio of housing units to households increased from 72.4% in 1990 to 102.2% in 2003. Direct price controls and strong anti-speculation measure were imposed, exerting downward pressure on prices.

Malaysia is following a similar path, increasing housing supply and providing subsidies. Government policies in these countries have substantially impacted the market.

In all these cases, the action the government has taken with respect to subsidized housing has tended to depress property prices.

Conclusion: No real estate boom in Asia

Asia's housing markets are on the road to recovery. But in contrast to the spectacular house price booms elsewhere in the world, the housing boom in Thailand and the Philippines is a construction boom. Europe, the US, Australia, and New Zealand have seen real estate booms -- prolonged above inflation increases in house prices. Asia has experienced in contrast a very substantial real decline in house prices over the same period.

This may be partly because in Asia there are few limits on new construction, whereas in most developed countries new construction is much more tightly constrained by regulations.

This construction boom brings its own dangers (though it may be early days to speak of such dangers). If supply rises faster than demand, prices will start falling and an overhang of unoccupied units will pile up. Even before the onset of the Asian Crisis, there was an oversupply of luxury units in Bangkok, Jakarta, the Klang Valley (Malaysia) and Makati (Philippines). The recent surge of construction in Asia, against the background of minimal real price increases and continued political uncertainty, suggests that the recovery may be short-lived.

But what can countries do about this? Increased demand from foreigners could help. Some Asian economies are trying to invite retirees. However, in addition to sun, sea, and fun, retirees look for peace and stability. Tanks rolling into the capital are not enticing.

For a land scarce city-state like Singapore, a restriction on foreign land ownership is understandable. But for land-rich countries like the Philippines and Indonesia, it seems questionable.

Foreign ownership of property in Thailand, Indonesia, Malaysia and the Philippines is still subject to many restrictions and regulations. Arguably, Asia's economies would benefit if these restrictions were phased out.

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